Top CROs report a strong financial start to 2006

The first quarter of calendar 2006 reveals a robust performance by the top clinical research outsourcing companies, suggesting that CROs' record financial performance last year is on track for a repeat in 2006, reports Phil Taylor.

The players that have reported figures to date all seem to be enjoying strong increases in demand for their clinical services – thought to be a result of an increase in the average size and duration of studies as pharmaceutical companies respond to regulatory demands for long-term safety studies, as well as carrying out more disease prevention studies. A move by the big pharma companies to reduce the number of CROs they deal with may also be helping the top companies.

Covance put in a robust performance, although its shares fell on the day after it blamed three held back clinical trials for missing Wall Street forecasts for quarterly revenues. The company posted net income up 16% to $33.4 million, better than expected, on the back of a 14% increase in revenues to $320.5 million, which came in a little lower than analysts’ estimates.

Revenues at the company's early development segment – comprising preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products - was $142.4, up 8.8%, and looks set to be boosted going forward by Covance’s purchase of eight clinical development sites from Radiant Research that will give it a significant hike in clinical pharmacology bed capacity.

Revenues for the late-stage development segment, which includes central laboratory, Phase II-III clinical development, commercialisation services and cardiac safety devices, rose 18.5% to $178.1 million. Meanwhile, Covance is sitting on a massive $1.72 billion backlog - sales of services for future clinical trials - which bodes well for future growth, said analysts.

Investors greeted Pharmaceutical Product Development’s first-quarter figures by sending the firm’s share price up 9%, shadowing its revenues which rose 23% to just under $300 million – putting the firm on track to join Quintiles and Covance among the $1 billion revenue CRO set - while net income leaped 27% to $42 million.

The firm’s main development services business brought in $256 million, up 21%, while the recently-implemented drug discovery unit – which finds drug candidates for pharmaceutical partners - advanced 47% to $19 million. Backlog grew 41% to $1.91 billion.

Shares in Parexel hit a year-long high last week after the company reported record fiscal third quarter profits which helped it shrug off the negative sentiment surrounding the firm’s ill-fated UK trial that left six men hospitalised as well as a sustained period of low growth.

Revenues for the quarter climbed nearly 17% to $157 million, while net income surged 46% to $6.8 million, although the same quarter last year had been affected by staffing shortages and project delays that ate into its bottom line.

Parexel’s Clinical Research Services business unit, which makes up more than 70% of group turnover, posted revenues of $113 million, a healthy rise of 18.5%. Future prospects at the company look healthy following an increase in backlog of $950 million, up 27% year-on-year.

Among the second-tier CROs, Kendle International put in another quarter of robust growth, with revenues beating Wall Street estimates, up by a quarter to $60 million and net income surging ahead 128% to $4.9 million, helped by a hike in operating margins from 12.2% from 9.8%.

Total business authorisations, which consist of signed backlog and verbally awarded business, totaled $342 million at the end of March, said the company.

Kendle has been trying to reduce its reliance on its larger customers by diversifying its business and expanding into new markets and, in keeping with this trend, earlier this month bought Latin American CRO IC-Research for an undisclosed sum. The company now claims to offer more coverage across the region than any other CRO.

Ireland-headquartered Icon saw its first quarter revenues rise 19% to $98.5 million, which helped it swing from a net loss of $5.2 million a year ago – caused by cancellations of projects valued at $46 million - to a profit of $7.5 million.

Net bookings - new contract signings minus cancellations – came in at $171 million, an all-time record for the company, according to chief executive Dr John Climax. Going forward, the business should get a lift from the acquisition of UK clinical pharmacology firm Medeval in February, as well as an expansion of its activities in Italy with the opening of a unit in Milan.

Looking to the coming months, it remains to be seen if the cost-cutting efforts undertaken by big pharma, and notably Pfizer and Merck & Co, will rein back the leading CROs financial growth over the remainder of 2006. But given that the first quarter tends to be slower for the sector, the signs are good.